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Every day, people are showered with advice about what is the best way to settle debts. However, let’s just agree on this fact – choosing the right way to repay your debt cannot be a “one-size-fits-all” method.
Several methods and techniques out there can help you settle your debts. Yet, the challenge lies in the fact that selecting the most suitable method could be a challenging task. What might work for one person may not work for the other.
With that said, the two most common methods used by individuals for settling debts are debt avalanche and debt snowball. If you are working on paying off your debts, you can certainly try the debt avalanche method.
This write-up will shed some light on what is debt avalanche and how it works. You would also get to find out more about the benefits of the debt avalanche approach to settling debts.
Using the debt avalanche approach, you can repay your debts with higher interest rates. As per its core ideas, you would need to start from the top instead of repaying smaller debts and gradually working up to the top.
Here, the idea is to repay all your high-interest debts before the lower-interest debts. It is because the former often results in higher interest payments in the long run. This method for debt settlement is ideal for people who want a more calculative approach to repaying debts.
According to experts, debt avalanche is an organised way to get rid of debts in a faster and more affordable manner. After paying off high-interest debt, you can then move to the next-highest interest loan. This step continues till all of your debts are settled.
The debt avalanche approach works the following way –
The outstanding debts could belong to any of the following categories –
Note down the amount you owe for each of these debts, the monthly payments, and the interest payable. You can also record the due dates of these payments.
Make a list of your debts starting from high-interest debts to low-interest ones. This list will help you prioritise the repayment of your high-interest debts. However, while your target is to get rid of high-interest debts, make sure you are directing minimum payments towards other debts as well, as this will keep you from falling behind on your payments and prevent you from hurting your credit score. Whatever extra funds are left, use them to repay the high-interest debts. You can also use the extra money that you earn to repay your debts, as this can help you settle the high-interest debts in full.
Once you have settled your highest-interest debts, start off paying your next-highest-interest debt. Channel more money towards the new debts as you no longer need to make minimum payments on the settled debts. Update the list monthly as your balance decreases and debts get settled.
To make this strategy work, you can consider following these tips –
When you are consistent with this approach, you not only settle the debts faster but also become a better manager of your funds and expenses over time.
Debt avalanche reduces the interest accrued over time. As you begin to pay off your principal amount, you start saving more and can repay the debt faster.
The following are the major benefits of this debt settlement method –
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